Garganas decries ‘lack of urgency’ to adopt reforms

The economy urgently needs to become more competitive and, to do so, must overcome «structural rigidities» that, among other things, keep inflation consistently higher than the average eurozone level, Bank of Greece Governor Nicholas Garganas said yesterday. Presenting the central bank’s interim report on monetary policy, Garganas decried the prevailing lack of urgency in Greek society for these reforms. «There is a lack of a sense of urgency in Greek society regarding the need for more structural reforms in the economy,» he said. These structural reforms would entail the deregulation of markets, including the labor market, the shrinking of the state, and the reform of the heavily indebted social security system. An aborted plan by the previous, Socialist government to reform the latter, decried by the then-opposition conservatives as too harsh, led to a half-baked alternative «reform» that, most experts agree, has done nothing to resolve the system’s fundamental problems. On Monday, Economy and Finance Minister Giorgos Alogoskoufis reiterated that no major social security reform will take place in the coming years, effectively complying with the wishes of the unions. The interim report warned that economic growth has already slowed down and that it would reach 4 percent this year, down from 4.5 percent in 2003. As for 2005, there was a possibility of a further «significant reduction» in the growth rate, although it did not specify how much. The government has drafted the 2005 budget on the assumption that growth will reach 3.9 percent. The average inflation rate – using the European Central Bank’s Harmonized Index of Consumer Prices (HICP) for easier comparison with the other eurozone countries – slowed to 3 percent in the first eight months of the year from 3.6 percent during the same period in 2003, but core inflation, which excludes such volatile items such as fuel, fruit and vegetables, is still high and is expected to reach 3.6 percent this year, up from 3.1 percent in 2003, a full 1.5 percentage points higher than the eurozone average. This will further undermine competitiveness and lead to job losses. «Fiscal imbalances and the acceleration of wage growth rates are having a negative impact on inflation and competitiveness,» the report said. «If they are not addressed promptly they will pose risks to the economy’s medium-term growth prospects.» The budget deficit for 2004 was last estimated at 5.3 percent of gross domestic product. However, it now appears likely that it will exceed even that, as revenues are lagging behind estimates. According to the Bank of Greece, the very high deficit was the result of the audit on finances made by the incoming government, the further loosening of fiscal policy, partly due to the cost of the Olympic Games, and the acceleration of wage rises to 6.4 percent from 5.5 percent in 2003. Specifically, the average gross salary of public servants will rise 8.4 percent from 6 percent in 2003, while in public enterprises it will rise 7.8 percent. Private sector salaries will rise by an average of 5.8 percent. The unit labor cost will rise 4.8 percent, up from 3 percent in 2003. In the private sector, it will rise 4.1 percent, from 3 percent in 2003. This has slowed down the drop in the unemployment rate, from 12 percent in 1999 to about 9 percent currently, despite the high growth rate. As a result, the Bank of Greece considers reining in spending as the top priority. Despite the fact that the 2005 budget target of a deficit equal to 2.8 percent of GDP is considered a bold one by many, the interim report says it is necessary to achieve it. Reining in spending would entail, first of all, a more moderate increase in wages, a point made often by Garganas, to the annoyance of trade unions. It is also vital to reduce bureaucracy and to encourage further competition in the electricity and passenger shipping sectors, the report says.